Spatial Groundwater Management: A Dynamic Game Framework and Application to California

Abstract

The design of policies and institutions to promote the sustainable management of groundwater resources for use in agriculture is both a long-term and short-term challenge in California and globally. When designing groundwater management policies, it is important to account for spatial externalities that may lead groundwater users to behave non-cooperatively. Spatial externalities arise because groundwater users face a common pool resource problem: because farmers are sharing the aquifer with other farmers, other farmers’ pumping affects their extraction cost and the amount of water they have available to pump. In this paper, we present a dynamic game framework for analyzing spatial groundwater management. In particular, we characterize the Markov perfect equilibrium resulting from non-cooperative behavior, and compare it with the socially optimal coordinated solution. In order to analyze the benefits from internalizing spatial externalities in California, we calibrate our dynamic game framework to California, and conduct a numerical analysis to calculate the deadweight loss arising from non-cooperative behavior. Results show that the inefficiencies arising from spatial externalities are driven by higher returns on crops, electricity input prices, whether the crop is an annual crop versus a perennial, the level of the groundwater stock, the climate of the region, and the adjustment costs of fallowing production. We find that the benefits from coordinated management in California are particularly high when crop prices are high.